Home Prices Fall Again
One of the factors weighing down on consumer sentiment is the persistent fall in home values. So it is worth noting today’s report on the Case-Shiller Index, which showed yet another month of decline – by 1.1% in February, the latest month of data available.
The index is a composite of prices in the top twenty housing cities in the country, and of those twenty only one, Detroit, has an increase in February. And only one, Washington DC, has shown an increase over the past twelve months.
Clearly the real estate market is still stuck deeply in the mire of the aftermath of the bubble. Indeed, after a brief rise in prices in late 2009 and early 2010, the market has either moved sideways or fallen slightly. We are now very close to giving up all that slight recovery. Prices fell 3.3% overall in the last year and are still headed down. Since the peak in prices back in 2005 they have fallen 32.5%.
The market is plagued by problems in both supply and demand. On the supply side there remains a very large, but not clearly defined, ‘shadow inventory’ of homes people would like to sell but which are not actively listed for sale because of low prices. The glut of foreclosed properties is also exerting downward pressure, and making it difficult to determine exactly what a sustainable price is in some areas. Even after the dramatic collapse in construction the supply of unsold new homes, at about 7.5 months worth of sales, is well above levels we see during times of healthy economic activity. On the demand side, even well qualified buyers are having a hard time finding financing as the banks do their usual about face on credit standards – banks always overcompensate for their sins, and hence add volatility to the very markets they complain about being volatile.
One of the great ironies of this cycle has been that an incredibly loose monetary policy has had little effect in boosting the interest rate sensitive aspects of the economy. With mortgage rates as low as they have been, we could have expected a more rapid recovery in housing. But the enormous drag of unemployment and the ongoing fragility of banking have overwhelmed the Fed’s efforts to boost activity.
When will this decline end?
Who knows.
In many respects we are at risk of overshooting the bottom in prices. By this I mean we are likely to see prices drop below the long term trend that affordability ratios suggest is the “normal” level around which prices cluster. The problem at the moment is that stagnant wages are preventing that long term trend line form rising, and the other factors, all of which are short term in nature, are thus dominating price formation.
Look for prices to keep on going down. One respite could be during the spring months as buyers sense interest rates might rise. In view of such potential they might be impelled to buy now rather than wait for even lower prices. Don’t bet on it though. Consumer sentiment is rotten despite April’s slight increase in confidence. Those higher gasoline prices are going to sap away at confidence over the summer, so, in the absence of a sudden pick up in the jobs market, I expect housing to fester all year long and well into next year too.
